Trust and Law in International Business Transactions

As a businessperson in the late 1980s, I learned what can happen if you didn’t understand the legal issues involved in an international transaction; indeed, understanding the law impacting international business was one of my primary motives for attending law school after 10 years as a publishing professional. And it was my love for this subject that first induced me to teach international business law to business majors at the University of St. Thomas. I wanted my students to understand the intimate interrelationship between the business and legal aspects of international transactions. In addition to my teaching interest, this is one of my primary areas of academic scholarship.

My research has focused on comparing United States and European Union laws that impact multinational businesses. For example, one article discussed the impact EU data privacy laws have had on the human resources practices of U.S. multinationals doing business in the EU. I also have researched international and national responses to protecting copyrighted content in a digital world. While I continue to explore comparative digital law issues, my most recent research focuses on the relationship between trust and law as firms form business alliances across national boundaries.

Recently, a marketing colleague I had met at a conference in Turkey forwarded an article by Finnish academics on the relationship between trust and contracts. I became intrigued, began research, and we now have co-written a number of papers on this topic.

There is a growing body of scholarship in international business disciplines that considers the relationship between trust, the law and cooperation between firms. Inevitably, as companies move across national borders, they confront different attitudes and practices in terms of business, legal issues and business ethics.

The number of companies born global or which outsource parts of their operations will continue to increase. This has brought differences across national borders into sharp relief. And American business will make a mistake if they believe that laws and legal systems in the countries in which they are doing business are the same or similar to those in the United States.

The matter is further complicated in that the laws and legal systems in a number of countries are in a state of flux as they move toward modernization. The combination of these business and legal factors indicates that, from both an academic and practical point of view, there is a great deal of interest in the topic of trust among businesses in the international value chain and the role the legal environment has in that process.

There is an old adage that if you have trust, you don’t need law. In actuality, the matter is much more complex. Our research examines the interrelationships between trust, commitment, and changing legal environments and their impact on the mode of doing business in a foreign country. We have a number of hypotheses, including that uncertain or hostile legal environments generally have a negative impact on developing what is called promissory trust. On the other hand, in countries with stable laws and trustworthy systems for resolving business disputes, law can replace some aspects of trust.

Although there are many different aspects of law and legal environment upon which I could focus my part of the research, I primarily consider intellectual property laws "on the books" and enforcement of those laws. Previous research suggests that the strong intellectual property laws support various modes of international business, including importing/exporting, licensing of intellectual property, and the form and quality of foreign direct investment. In some ways, intellectual property laws may act as a proxy for other areas of business law.

I find this stream of research exciting. It is interdisciplinary, requiring review of the social and behavioral science, international business, and law literature as we strive to define and understand the nature of trust and commitment. It also is dynamic, since trust, commitment and legal environments develop and change over time.

To support our hypotheses, we have developed a model for trust and commitment in international interfirm alliances in conditions of legal uncertainty or hostility. The model is dynamic and takes into consideration the complex interrelationship between trust, commitment and the form of international business that may result. The legal environment in the foreign country serves as a contingency that impacts all stages.

Initially, we are examining the changing legal environments of Hungary and Poland as they harmonize their laws with EU standards, and Russia and Ukraine as they modernize their laws to accede to the World Trade Organization. We plan to test our model and hypotheses cross-culturally, focusing on case studies in small and medium enterprises begun around 1990 in at least two industries in the countries we have identified.

In addition to this research having practical application and being intellectually challenging for me, it informs how I teach law and international business transactions. Each semester, the undergraduates in my international business law course negotiate a contract, often with students they do not know at another academic institution. At the M.B.A. level, I have taught a course in which St. Thomas M.B.A. students negotiate a contract with German business students. My growing understanding of the nature of trust and commitment as a part of the business alliance process enhances the way I teach negotiation and drafting of international business contracts.